Amortization
Learn what amortization means in finance and loans.
Definition
Amortization is the process of gradually paying off a debt over time through scheduled payments. Each payment covers interest and principal.
Example
For a $10,000 loan at 5% interest over 5 years, you pay fixed monthly installments gradually reducing the principal.
Calculation
Amortization=Total Payment−Principal
(Monthly Payment×n) −Principal
Example: For a $10,000 loan at 5% APR over 3 years:
Monthly Payment ≈ $299.71, n = 36 months
Total Payment ≈ $10,789.56
Amortization (Interest) ≈ $789.56
Monthly Payment ≈ $299.71, n = 36 months
Total Payment ≈ $10,789.56
Amortization (Interest) ≈ $789.56